• Robert MacCulloch

Shonky Advice to the Minister of Finance from the NZ Treasury and RBNZ

Stuff news reports that an "Aide Memoire" was sent by the NZ Treasury and Reserve Bank of NZ, jointly, to the Minister of Finance whose aim was to explain the similarities and differences between Quantitative Easing (QE) and Monetary Financing (MF).

There's just one problem with their advice. It's wrong! Page 1 of the document says that the purpose of BOTH Quantitative Easing and Monetary Financing is to "support aggregate demand by easing financial conditions when ability to use traditional monetary policy levers constrained".

The primary purpose of QE is to support aggregate demand. It does so by reducing longer term yields on bonds, thereby lowering borrowing costs. However, the primary purpose of MF is to provide an alternative way to finance government spending aside from borrowing and taxation. These two "purposes" are different. Monetary financing of public expenditures was used in the 1920s to pay for spending by the German State, including reparations imposed on the country after World War 1. In that case it led to hyperinflation. It had little, if anything, to do with "supporting aggregate demand".

Oh, and by the way, monetary financing is illegal under European Law. The European Central Bank states (below) "We are prohibited from monetary financing for good reasons". Did Treasury and the RBNZ intentionally argue that QE and MF have the same purpose, when they do not, for some unknown reason? Or has the level of competence at these institutions fallen so low that they just don't get it?

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